Esso Australia Resources Pty Ltd v Commissioner of Taxation

Question 12 152 For the reasons given in relation to the 1997 payments, the Commissioner agreed that the 1991 and 1993 Shortfall Payments constituted assessable petroleum receipts in the tax years in which they were receivable, namely, the tax years ended 30 June 1992 and 1994. 153 It followed, according to his Honour, that the amounts incorrectly included by Esso in its assessable petroleum receipts in respect of Make Up Gas in the tax years ended 30 June 1993, 1995 and 1996 should be excised from its returns for those years and added back to its assessable petroleum receipts in the tax years ended 30 June 1992 and 1994. 154 However, his Honour came to a different view with respect to the 1987 and 1988 Shortfall Payments made before the date (1 July 1990) from which the Act was to apply to the Bass Strait project. 155 Esso contended that, consistently with the 1991 and 1993 Shortfall Payments, the 1987 and 1988 Shortfall Payments should be treated as consideration for, or in relation to, the gas supplied in those years. His Honour agreed at [509] that if s 33(4) of the 1991 Amendment Act did not exist, that would be the correct treatment. 156 An aspect of the extrinsic materials leading to the enactment of the 1991 Amendment Act is relevant to the take or pay issue. On 4 March 1991, the OPC provided to the ATO a draft of the Bill that became the 1991 Amendment Act. The draft Bill contained a transitional clause relating to the application of the PRRT regime to the Bass Strait project. A note under the draft transitional clause raised the following query: Could receipts be derived before 1 July 1990 in respect of Bass Strait petroleum recovered after that day? If so, may need a provision taking the receipts to be derived in the financial year in which the petroleum is recovered. 157 In a letter dated 12 March 1991 to the OPC, the Department of Primary Industries and Energy responded to the OPC's query. It stated: Discussions with Victorian Government officials confirm that there are instances where Bass Strait petroleum has been paid for but not recovered as of 1 July 1990. The case so far identified relates to commercial gas (natural gas) purchased under a take-or-pay contract between the Bass Strait producers and the State Electricity Commission of Victoria (SECV), under which the SECV has paid for gas that it has not taken (the gas has not been recovered). As the draft Bill now stands this would place the gas paid for but not taken outside the reach of both royalty and RRT. We are taking up with Victoria whether there might be other instances where Bass Strait petroleum has been paid for but not recovered prior to 1 July 1990. 158 Section 33(4) of the 1991 Amendment Act provided: For the purposes of the application of the [Act] as amended by this Act to the Bass Strait project, any consideration received by a person before 1 July 1990 in respect of petroleum recovered on or after that day is taken to be received in the financial year in which the petroleum is recovered. 159 His Honour's relevant process of reasoning is in [507] of his Reasons: 507 The making of the 1987 and 1988 Shortfall Payments entitled the SECV to take Make Up Gas in the succeeding four years subject to the conditions of clause 8.1 of the SECV Agreement. The SECV exercised that entitlement in the tax years ended 30 June 1991 and 1993 by taking sales gas produced from petroleum which, it is to be inferred, was recovered after 1 July 1990 within the meaning of s 33(4) of the 1991 Amendment Act. The 1987 and 1988 Shortfall Payments therefore constituted consideration received by Esso before 1 July 1990 "in respect of petroleum recovered" on or after 1 July 1990 to the extent that Make Up Gas was taken on or after that day. Accordingly, s 33(4) of the 1991 Amendment Act requires that those payments be taken to have been received in the financial year in which the petroleum (from which the sales gas supplied to the buyer was produced) was recovered, namely 1991 and 1993.

Question 11 160 In relation to the principal take or pay issue raised by question 11 in respect of the 1997 Shortfall Payment, the co-venturers' contentions were no different from those rejected by his Honour below. They should again be rejected for the same reasons. 161 In our view, it is not possible to construe the relevant provisions of the SECV Agreement, in the context of that agreement, in a way which leads to a characterisation of a Shortfall Payment as being consideration for anything other than the gas supplied in the relevant year. The terms of cll 7.3 and 19.1 of the SECV Agreement make it clear that the MAP for a year is just that, a minimum annual payment for the gas supplied in that year. The Shortfall Payment obligation in cl 7.3 merely complements what is otherwise the consideration for the gas taken in a particular year; a sum certain (the MAP) no matter how much gas is in fact taken. 162 That conclusion is fortified when it is understood that the entitlement to Make Up Gas arises not out of making a Shortfall Payment pursuant to cl 7.3, but as a result of the terms of cl 8.1, namely, the SECV failing to take the MAQ for that year. So much is exemplified in a year, as occurred in the 1994 and 1995 calendar years in which the SECV took its MAQ but nevertheless was required to make a Shortfall Payment, it did not receive any entitlement to Make Up Gas. In such circumstances, the 1994 and 1995 Shortfall Payments can only have been consideration for the gas sold and delivered in the calendar years ended 31 December 1994 and 1995. 163 The description in argument of the relevant provisions of the SECV Agreement as "take or pay" provisions is apt to distract attention from the task of determining whether the Shortfall Payment is "consideration receivable … in relation to the sale". If the Shortfall Payment is "consideration receivable … in relation to the sale", that is because it is, in substance, part of the payment for gas supplied by the co-venturers to SECV. The resolution of this issue is not assisted by the invocation of the "take or pay" label, or by reference to authorities concerned with the interpretation of different legal language. 164 The co-venturers, as they did before the primary judge, placed reliance on a decision of the United States Court of Appeal for the Fifth Circuit: Diamond Shamrock Explorations Co v Hodel 853 F.2d 1159 (5th Cir. 1988) referred to with approval by Lander J in Alliance Petroleum Australia NL v Australian Gas Light Co (unreported, Supreme Court of South Australia, Lander J, 23 December 1994) who said (at 12), in relation to a take or pay clause that as "explained in the Shamrock Case, the payment was not for the gas taken, but for the failing to take the gas". It may be said immediately that those authorities are of no assistance being, as they are, concerned with clauses having different terms and, more importantly, different contractual contexts. The relevant terms and contractual context of the SECV Agreement are not to be construed by reference to conclusions drawn in other cases from decisions about different contracts. 165 In our view, the learned primary judge correctly answered question 11; there is no error to be found in his Honour's process of reasoning leading to that conclusion.

Question 12 166 On the other hand, there are at least two difficulties with his Honour's approach and conclusion on the issue raised by this question, insofar as it relates to the 1987 and 1988 Shortfall Payments. The first difficulty has its source in the proper construction of the relevant terms of the SECV Agreement; the second, in the terms of s 33(4) of the 1991 Amendment Act. These difficulties cannot be obviated by reference to the extrinsic materials. The language of s 33(4) is not so obscure or ambiguous that the extrinsic materials can be invoked so as to enable s 33(4) to yield a meaning which accords with the Commissioner's contention. See s 15AB(1) of the Acts Interpretation Act 1901 (Cth). 167 First, as the learned primary judge found at [498] of his Reasons, the entitlement to Make Up Gas arose, not as a result of making a Shortfall Payment pursuant to cl 7.3 of the SECV Agreement, but as a result of the terms of cl 8.1 and the SECV's failing to take the MAQ for that year. Thus, in a year in which the SECV took its MAQ but nevertheless was required to make a Shortfall Payment, it did not receive any entitlement to Make Up Gas. Under the terms of the SECV Agreement, the Shortfall Payment in any year, could never be consideration for Make Up Gas taken in a subsequent year. It follows that, if the 1987 and 1988 Shortfall Payments could never be consideration received in respect of Make Up Gas taken in a subsequent year, they could never be consideration receivable in respect of petroleum recovered on or after 1 July 1990, as contemplated by s 33(4) of the 1991 Amendment Act. 168 Second, the 1987 and 1988 Shortfall Payments were not consideration received by the co-venturers before 1 July 1990 in respect of petroleum received on or after that day; they were received by the co-venturers before 1 July 1990 in respect of the sale (not recovery) of gas (not petroleum) in the relevant year. The deeming worked by s 33(4) of the 1991 Amendment Act is simply not apt in its terms to bring the 1987 and 1988 Shortfall Payments into assessable petroleum receipts under either ss 24(a) or (b) of the Act in a tax year commencing on or after 1 July 1990. 169 As we have mentioned, the extrinsic materials referred to at [157] above do not alter this conclusion. At best for the Commissioner, they may be said to identify the mischief at which s 33(4) was aimed; they cannot modify the language in which the Parliament addressed that mischief. That language is simply not apt to modify the operation of the SECV Agreement, an accurate appreciation of which appears in the answer to Question 11. 170 For these reasons, we do not agree with his Honour's answer in para (a) to question 12. In our view, the answers to paras (a) and (b) should be deleted and replaced by the following: (a) The amounts of $3,550,209, $4,837,022, $1,910,944 and $5,673,019 respectively should be excised from the Applicant's assessable petroleum receipts in the years ended 30 June 1991, 1993, 1995 and 1996 respectively. 171 Paragraph (c) should be redenominated para (b).

Third Issue: MLMDQ/MDQ payments Issue 172 The third issue, this time agitated by the Commissioner's cross-appeal, concerns what is described by the learned primary judge in his Honour's Reasons as the "MLMDQ issue". The issue is raised by the last of the 13 questions set down for separate hearing and determination. 173 Question 13 is as follows: Were all or part, and if so how much, of the amounts received by the applicant from the Gas and Fuel Corporation of Victoria pursuant to the Further GFC Agreement (as set out in the table contained in paragraph 15 of the [contentions]) assessable receipts for the purposes of the … Act in the tax years in which those payments were received? 174 His Honour answered question 13: The following amounts the subject of Question 13 were not assessable receipts of the Applicant for the purposes of the Act: 175 In this answer, the reference to 'the Applicant' is, again, a reference to both Esso and BHPBP.

The Facts 176 The learned primary judge summarised his findings of fact relevant to the MLMDQ issue at [456] to [471] of his Reasons. Again, they are not in dispute. Again, it is not necessary to repeat them all but some, such as the relevant terms of the Consolidated Natural Gas Sales Agreement (Sales Agreement) made as of 1 January 1975 between Esso and Hematite Petroleum Proprietary Ltd (which subsequently assigned its rights to the entity that is now BHPBP) (together, the sellers) and Gas and Fuel Corporation of Victoria (GFC), whereunder the sellers agreed to sell and deliver natural gas to GFC, are fundamental to the answer to question 13. 177 The MLMDQ payments arose from a variation of the Sales Agreement.

The Terms of the Sales Agreement 178 The Sales Agreement provided for a specified volume of natural gas, sourced from dedicated gas fields, to be sold to GFC. Over the term of the Sales Agreement, the sellers agreed to deliver 50 billion therms of natural gas to GFC. 179 Under cl 5.1 of Article V, the sellers were only required to deliver the quantity of gas required by GFC each day during the term of the Sales Agreement up to an agreed amount (the MDQ). Under cl 4.3(a) of Article IV, GFC was required to inform the sellers of the MDQ to be set for the contract year five years in advance (the MDQ for the years 1975-1979 was pre-determined and set out in Table I to the Sales Agreement). Subject to a minimum requirement, the MDQ nominated by GFC had to be equal to or less than the sellers' maximum daily supply capacity (described as the maximum limit to MDQ, or MLMDQ) determined in accordance with the Sales Agreement. 180 Table I to the Sales Agreement set out the MLMDQ to apply from 1980 to 1989. Under cl 4.3(b), for the contract years from 1990 the sellers were required to nominate their MLMDQ 10 years in advance. When nominating the MLMDQ 10 years in advance, the sellers were required to use their best endeavours to satisfy GFC's Maximum Daily Requirement (MDR). Under cl 4.3(c), GFC was required to provide the sellers with its bona fide forecast of MDR 10 years in advance. 181 Importantly, these provisions dealing with the rate at which gas could be taken during any day did not alter the total volume of gas to be acquired by GFC under the Sales Agreement. Nor under the Sales Agreement did GFC pay any specified consideration to Esso under the mechanism by which the parties established the MDQ.

The sellers' MLMDQ nominations under the Sales Agreement 182 The sellers made the following MLMDQ nominations for the contract years from 1990-2000: 183 By letter dated 7 September 1990, GFC advised the sellers that its forecast requirements were as follows: 184 In August 1990 the GFC approached the sellers about increasing the MLMDQ levels set under the Sales Agreement so that it could access a higher level of MDQ in 1995-2000 if it was required.

The agreement to increase the MLMDQ levels 185 The parties reached an agreement in mid-1991, which is set out in the letter dated 6 June 1991 (referred to as the Heads of Agreement), and the subsequent letter dated 17 December 1991 as modified by the further letter dated 29 June 1992 (collectively, the MLMDQ Agreement). 186 Although the letter dated 17 December 1991 states that the sellers agreed to revise the MLMDQ advised to GFC over the period from 1991-2000, the MLMDQ was only actually increased in the years from 1995 to 2000: 187 Importantly, the increased level of MLMDQ did not increase the amount of gas to be sold. It increased the range in which GFC could nominate the maximum quantity of gas to be delivered on a given day. 188 The terms of the MLMDQ Agreement were incorporated into a new Gas Sales Agreement between the co-venturers and Gascor dated 20 November 1996 (the 1996 Agreement), which superseded the Sales Agreement.

The increased MLMDQ levels 189 GFC agreed to make monthly payments for the period from July 1991 through to December 2000, which consisted of a fixed and a variable component (described in cl 1.3 and cl 1.4 of the document enclosed with the letter of 17 December 1991). The MLMDQ payments invoiced and returned as assessable receipts by Esso were: 190 The difference between the invoiced amount and the amounts that Esso returned as assessable petroleum receipts was due to the accounting treatment of these amounts.

The learned primary judge 191 The learned primary judge concluded that the MLMDQ payments were not consideration for the sale of gas; they did not move the sale of the gas: Woodside Energy Ltd v Federal Commissioner of Taxation (2009) 174 FCR 91 at [62], [63] (Woodside Energy). No additional gas was recovered, produced or sold for the MLMDQ payments as the variations made by the MLMDQ Agreement did not in any way change the total volume of gas to be sold. 192 His Honour's conclusion was summed up at [482] to [486] of his Reasons: 482 In my view, in the absence of any additional sale of gas, the MLMDQ payments did not have the relevant and direct nexus with the sales of gas originally agreed in 1975 under the Sales Agreement. 483 The PRRT is relevantly imposed on the sale of gas. The focus is upon that sale and the consideration for the sale. The Commissioner submits that the payments made pursuant to the variations to the Sales Agreement do not stand alone, and make no sense without the Sales Agreement. So much is true. However, the question is to determine, within that context, what the consideration was for the sale of the gas. 484 In my view, it is important to characterise the transactions, and focus upon the operation of the MLMDQ payments as set out in the contractual documents. 485 I accept the characterisation submitted by Esso. The important point is that the sellers were willing to transfer to the buyer the gas for the consideration agreed to in the Sales Agreement excluding the MLMDQ payments. The MLMDQ payments did not move the transfer of the gas, rather they related to a specific variation that did not affect the quantity or quality of the gas sold. 486 On this basis I do not accept the position taken by the Commissioner in relation to the MLMDQ payments.

Consideration on Appeal 193 We agree with his Honour's conclusion for the reasons his Honour gives. 194 It is apparent that the MLMDQ payments were to be made, not as consideration for the sale of gas but as consideration for the sellers agreeing to revise the MLMDQ previously advised to GFC over the period 1991-2000. So much follows from the relevant clauses in the heads of Agreement that accompanied the letter of 17 December 1991 referred to in [185] above. Under the heading: Revision of MLMDQ Profile for Period 1991-2000, it is provided: 1.0 Sellers agree to revise the MLMDQ advised to Buyer over the period 1991-2000 in exchange for the present value equivalent of 10 annual payments of $25 million (90) escalated at 100% CPI from 1990. The annual payment schedule is based on a 70/30 fixed/variable formulae and is to commence from 1/7/91 in accordance with cl. 1.3 - 1.6. 1.1 In accordance with clause 1.0 Buyer may revise its current delivery nominations to the levels indicated below: TABLE 1 YEAR MLMDQ (M Therms) 1991 8.2 1992 8.3 1993 8.3 1994 8.3 1995 8.7 1996 8.4 1997 9.7 1998 10.0 1999 10.3 2000 10.5

195 It is clear that this has nothing to do with the price at which gas is sold nor does it in any way vary the terms of Article XII, in particular clause 12.1, of the Sales Agreement. 196 The Commissioner argues that the words of connection "in relation to", used in s 24(b) of the Act, are broader in scope than, for example, "consideration for the sale". It is said to be a connection of the latter kind which is reflected by his Honour's reasoning. Consideration "in relation to" the sale is sufficiently broad to include payments which are the price paid by the buyer for more favourable terms in relation to the timing of delivery of gas. 197 In Woodside Energy, this Court was concerned with whether losses incurred by the taxpayer in connection with hedging transactions it had entered into in relation to anticipated sales of crude oil were "expenses payable … in relation to the sale" of the oil under s 24(b) of the Act. That case is a far cry from the present. The hedging transactions in that case were made with parties other than the buyers of the oil. Nevertheless, the observations of the Full Court, following those of Dixon J in Archibald Howie Pty Ltd v Commissioner of Stamp Duties (NSW) (1948) 77 CLR 143 at 152, are pertinent. The Full Court observed that "consideration" in s 24(b) of the Act "would not encompass a passing of money or value which does not move the relevant sale" (Woodside Energy at [63]). 198 It may be accepted that the connection between the MLMDQ payments and the sale of gas is less remote than the connection between the hedging contracts and the sales considered in Woodside Energy. Nevertheless, the MLMDQ payment was quite evidently not a quid pro for the delivery of gas. Rather, it was a payment for an agreement to an enhancement of the buyer's rights as to the timing of the delivery of the same quantity of gas. 199 In this regard it is to be noted that s 24(b) of the Act was concerned (as is s 24(1)(b) of the Act after the 2001 amendment), with the consideration receivable in relation to the sale, not the agreement for sale. The ordinary meaning of the word "sale" is a transfer of property in return for a consideration in money or money's worth: Simpson v Connelly [1953] 1 WLR 911; Robshaw Brothers Ltd v Mayer [1957] 1 Ch 125 at 131-132; Sun World International Inc v Registrar, Plant Breeders' Rights (1998) 87 FCR 405 at 406, 412. 200 In some legal contexts, it may be unduly pedantic to distinguish an agreement for sale from a sale. But in the context of s 24 of the Act, the term "consideration" is concerned with the money or money's worth "receivable … in relation to the sale" rather than the consideration moving from each party to the agreement apt to make the agreement for sale binding on the other parties. The focus of s 24 is explicitly upon the consideration receivable by the seller in order to entitle the buyer to a transfer of the agreed quantity of the commodity. 201 Where a long term supply contract obliges the seller to supply a quantity of gas and the buyer to pay an amount for that quantity of gas, the buyer would usually have no entitlement to gas beyond that paid for; and in such a case, the seller would be entitled to recover damages for breach of contract but the seller would not usually be entitled to recover the price payable for the product. Thus, an entitlement in the seller to recover damages for the buyer's breach of contract would not ordinarily be described as an entitlement to "the consideration receivable … in relation to the sale" for the reason that "the sale" has, ex hypothesi, not occurred. 202 Long term supply contracts can be expected to contain provisions which regulate, over the life of the contract, the rights and obligations of the parties in relation to a broad range of commercial risks attendant upon the relationship between the parties. Many such provisions will not be concerned with the price to be paid for the goods to be delivered. A provision which entitles one party to vary the time of completion would not ordinarily be seen as relating to the payment which is necessary to oblige the vendor to complete the transfer of the goods. Reference to the statutory context confirms that this view applies here. 203 Under the Act, the determination of "assessable petroleum receipts" by reference to "the consideration receivable … by the person in relation to the sale" occurs in the context of a scheme whereby tax is imposed on the profit derived from the commercial exploitation of a natural resource. In this context "the consideration receivable in relation to the sale" is readily seen as payment receivable in return for the successful exploitation of the natural resource. Provisions of an agreement for sale which are not concerned with the quantum of money (or money's worth) payable to the seller in order for the buyer to become entitled to receive a particular quantity of petroleum or marketable petroleum product do not bear upon the extent of the exploitation of the natural resource or the profits derived from the commercial realisation of its value. The natural resource available for exploitation and profitable realisation has not been relevantly depleted by what has occurred. 204 Finally, we observe that the fact that the parties may have achieved the same commercial or economic result by varying the sale price of gas for the period 1991 to 2000 rather than providing for the MLMDQ payments to be made in accordance with the relevant provisions of the heads of agreement does not provide any assistance in characterising the MLMDQ payments. As was said in the plurality judgment in the High Court in Federal Commissioner of Taxation v Orica Ltd (1998) 194 CLR 500 at [70]: [L]ittle or no guidance is offered by considering what other transactions the taxpayer might have made to achieve a commercial result substantially the same as the commercial result said to flow from the making of the Principal Assumption Agreement. No doubt the taxpayer might have taken the amount of $62,309,546 which it paid to MMBW and instead of paying it to MMBW under the Principal Assumption Agreement have invested it in Commonwealth Bonds maturing at or about the same time as its debentures were to mature. If it had done that it would have derived income which it might then have applied in satisfaction of most, if not all, of its liabilities to debenture holders. Similarly, it might have invested the same amount as it paid to MMBW on more speculative investments and it might then have obtained returns greater than the amount necessary to pay the debenture holders Examination of those other transactions does not reveal whether or when the taxpayer derived income as a result of the making of the Principal Assumption Agreement. In particular, the characterisation of the gains or receipts obtained in accordance with hypothetical transactions of the kind described is of little, if any, assistance in characterising the nature of the benefits identified as flowing from the making of the Principal Assumption Agreement. 205 For these reasons, the Commissioner's cross-appeal on the MLMDQ issue should be dismissed.

CONCLUSIONS AND ORDERS 206 After these reasons had been prepared, the Court was informed that the Tax Laws Amendment (2011 Measures No 8) Act 2011 received Royal Assent on 29 November 2011. Schedule 2 of that Act makes amendments to the definition of "marketable petroleum commodity" which appear to be directed to confirming the correctness of the decision of the primary judge on the taxing point issues relating to Questions 1 to 9 inclusive. Whether or not these questions should be determined in accordance with the provisions of the new Act, the outcome could be no different. Accordingly, the co-venturers' appeals in relation to Questions 1 to 9 inclusive should be dismissed. 207 The co-venturers' appeals should be dismissed save in relation to Question 12. We would amend Question 12 as follows: (a) The amounts of $3,550,209, $4,837,022, $1,910,944 and $5,673,019 respectively should be excised from the Applicant's assessable petroleum receipts in the years ended 30 June 1991, 1993, 1995 and 1996 respectively. 208 The Commissioner's cross-appeal in relation to Question 13 should be dismissed. I certify that the preceding two hundred and eight (208) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Chief Justice Keane and Justices Edmonds and Perram.

Associate: Dated: 6 December 2011 Note: The orders foreshadowed at the conclusion of the judgment were not made at the request of the parties. The Court directed that the parties confer and thereafter by 4:00 pm on 20 December 2011 file minutes of any further orders (including orders as to costs), and in the event of disagreement, file and serve written submissions as to the contentions of the parties